According to Fondo Valores Inmobiliarios, member of CONAPRI's board of directors:

Venezuela is a Business Opportunity Today

Venezuela is a Business Opportunity Today

Author: Horacio Velutini, CEO of Fondo de Valores Inmobiliarios, member company of Board of Directors of CONAPRI

November 2019

Introduction

Venezuela has become a complex system with a lot of information and very little disclosure. It is a chaos that constantly creates new patterns. Venezuela has been a different country since Hugo Chavez arrived as a president in 1999. It is not the same as it was just a few months ago and it will certainly not be the same tomorrow.

Political issues have become so entangled that the opportunities for a solution are beyond local agreement. It seems that solutions of the issue in Venezuela are in hands of foreign countries. Also, the Venezuelan private sector, or its remains, has struggled for almost two decades with mistaken economic policies, controls, takeover of companies and a disregard for the private sector. The results of these policies have caused a hyperinflation, and there has been a sharp drop of the GDP, perhaps 25% of what it used to be.

Also this hostile environment has brought several economic sanctions and the situation became worse, due to misinterpretations of the financial community, which are not willing to invest in Venezuela because they are avoiding the sanctions. This overcompliance is one of the factors that affect the private sector the most, and it is actually a constant threat.

Our private sector has always had a western influence on economics because of the impact that the American Oil Industry has had in Venezuela since the 19th century.

Large foreign conglomerates are able to negotiate waivers. But local companies are not. Local business cannot offer services to any state enterprise. This doesn’t make sense. The private sector should be left out of sanctions and overcompliance, so it can function as a response to the circumstances. This will enable them to replace the network of government-related informal businesses. Today, Venezuelan private sector has a real chance to be relevant when it never has been. This is why the private sector requires non-political institutions that promote solutions in the domestic scenario, and protection in the international context.

Within this context

Large investments, that were expected to come after political change, foreign investor interested in taking part in the privatization of state-owned enterprises and in the oil industry under the classic umbrella of the IMF and WB, are simply not going to come in the short term. Large local private companies have seen production been reduced by 50 or 80%. Large banks with a financial system of $20.000 billion, today only have the capacity to lend $200 million. Whoever had 20,000 employees, now needs no more than 2,000. Big companies have great difficulty in surviving and do not have the support of the international community. Only their sympathy.

Factors to consider

The economy of Venezuela is today about 1/4 in relation to the year 2012, approximately 75,000 MM $. Businesses that have opportunity are small ones. The ones that just started, or are about to start. It is not the same to invest in a business with 10 employees, which can project a growth in the next few years to perhaps 50 employees than investing in one that has 2,000 employees, but that due to the fall production, is at 20% of the installed capacity, and only produces to pay 200 employees. These businesses are barely surviving. Small initiatives become opportunities to be seized. Maybe these small initiatives will be the big ones in the next decade. Venezuela today is not attractive to large multinational, but it certainly is to entrepreneurs and medium size companies.

It is estimated that Venezuelan residents and non-residents have about $500,000 billion in savings abroad. Actually, these savings, which now come back to cover the expenses or the investments for a small economy, have an important effect. It is estimated that this figure could reach $3 billion by 2019.

On the other hand, the misfortune of massive migration of Venezuelans now brings a benefit: remittances, which could also be estimated around $3 billion in 2019.

Therefore, something unprecedented is happening. Private sector revenues of perhaps $6 billion in 2019, can be an important part of the national income. This is totally new in the Venezuelan economy. For decades, private sector has only contributed with 5% of total export revenues. This is changing rapidly, and surprisingly the government embraces it. And the opposition does not encourage it.

This decumulation factor, plus remittances have brought an important rebound in retail sales. Especially high-end commercial activities in some cities, and particularly in Caracas. Small niches of prosperity appear. This commercial activity is better than that of 2018. Although, it is still far from that of 2012, where imports were around 65,000 MM$ or 2,700 $ per person.

Another interesting factor is that government’s economic policies tend to be more orthodox for the first time in more than 15 years. Price controls, including those of the dollar, have been left to adjust under supply and demand. We must realize that controls and dependence on oil income date back at least a 100 years. Economic problems of today and the economy of the Government, are the same as those of the 20th century and they have worsened. These recent changes must be embraced as something positive, if we really want to shift to a free and competitive economy.

Asymmetric returns

Another reality is, with all private sector companies in bad shape, investment opportunities open up with the possibility of generating truly asymmetrical returns compare to those of the financial world. There are investment business opportunities in many sectors with medium-term vision. Not for billion dollar operations, but rather for those around one to 10 MM$. These investments can generate annual returns of about 20%. A company with 100 years of operations in Venezuela that used to be valued at 500 MM$, today is worth perhaps 50 MM$. And most likely still has the capacity and management to recover production and sales. Thus, offering great chances to be valued back at 500 MM$ in the future. There are also initiatives estimated around $10 million that can be converted into large agro-industrial, pharmaceutical, industrial and service businesses.

We must keep in mind that Venezuela is a vast land of natural resources compared to other Latin American countries, since not only we are positioned among the largest oil reserves in the world, but we are also a country with important gas reserves. Venezuela owns substantial reserves of raw materials, tourism, strategic locations reachable by air, and we generate hydroelectric energy.

State-owned utilities can be privatized. There are 900 enterprises taken over by the government that could be transferred back to the private sector as private and publicly owned. Venezuelan citizens have savings in foreign currency in a proportion of at least 6 or 7 times the current GDP, something that is not accounted for since there is no formal monitoring of these figures. Since 1983, Venezuelans have been prompted to keep their savings in US dollars, and this tendency was growing during the period of the second oil boom between 2002 and 2012.

The collapse of the Venezuelan economy cannot be analyzed and treated in the same way as other third world economies. It certainly requires a special chapter. We must notice that Venezuela needs to rebuild itself.

Venezuela: an asymmetrical business opportunity

Venezuelan businessman with established companies, consider that the present crisis offer excellent business opportunities. In this moment, is possible to acquire businesses worth around $50 million or less. Billion dollar businesses will come in another context, at another time and will certainly come.

Private sector must be framed within the Venezuelan Stock Market, so they offer transparency to investors and the international financial world. Today, this market offers a capitalization of approximately 3,000 MM$ and has the potential to grow around 150,000 MM$ as we┬┤ve seen in Colombia and Chile.

That is why, we and other recognized companies active on the capital market, promote the creation of the National Chamber of Issuing. With a vision free from political organizations, but that will encourage ruling and regulations from the Ministry of Finance. And that will also promote and offer support to the Stock Market. Right now there are signs that this is already happening. In addition, this Chamber could reach out to the international financial world and promote the sale of companies and non-governmental sectors. This will help us to explain how the private sector is organized in Venezuela.

There is also the participation of CONAPRI, National Council for Investment, (www.conapri.org) an institution established in the 1990’s that brings together an important group of private companies who promote better conditions for investment.

Closing comments

The private sector must be promoted and protected from subjective interpretations and overcompliance. Formal private sector, which is easy to monitor, must be encouraged and allowed to occupy public sector spaces in areas of services and the production of medicines and food. Stock Market should be encouraged to be transparent as well. Otherwise, unscrupulous minds will change regulations and adhere to legal and financial structures that know how to operate in sanctioned environments. Shady businessmen will be likely to take the place of the remaining private sector, which has struggled many years not to succumb to this perfect storm.

We are businessmen willing to support our country. We expect changes and we have the ability to see opportunities today. We are entrepreneurs who do not wish to participate in the political diatribe. We are only interested in the consolidation of a 50 year plan for our nation. We do not wish to give opinions in the political arena. But we do want to advocate an economic liberal model. An open economy that encourages private and mixed businesses, entrepreneurship and opportunities. The country will keep on changing and will not wait. We consider those changes to be the concern of society at large. It is not just a plan for tomorrow. Political issues are the concern of politicians. And the business world is where businessmen should have room for their opinions.

For investors, investing capital has nothing to do with empathy. They only look for opportunities. That’s why entrepreneurs should talk about investment opportunities and possible returns, with clear data and accurate financial analysis.